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GD to Upgrade More LAV III Vehicles

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General Dynamics Corporation’s (GD - Analyst Report) unit General Dynamics Land Systems-Canada has received a contract modification worth $133.5 million from the Government of Canada for the up gradation of 66 more LAV III vehicles.

Per the contract, the up gradation task will include introduction of double-V-hull technology, as well as armour protection and energy-attenuating seats.

The contract is an extension of a previous contract received in October 2011. In October 2011, General Dynamics had received a contract worth $1.052 billion to modernize 550 vehicles. With the current contract, the company will modernize 616 vehicles, which will, in turn, improve their survivability, mobility and firepower while broadening the fleet's lifecycle to 2035.

With these up gradations, automotive performance, handling characteristics and payload capacity of LAV III vehicles will be optimized with mobility system upgrades. This will includes a more powerful engine, more robust driveline and suspension, and a height management system (“HMS”).

With this modernization assignment, the 25mm turret's crew ergonomics will be improved by slotting in larger hatches. Moreover, its potential will be improved by the addition of the most modern technologies that will include improved fire control, thermal, day and low-light sights and data displays. Additionally, these improvements will provide the crew members higher security against mine blasts, IEDs and other threats. All regions of Canada will benefit from this work, and the company expects the task to be completed in 2017.

General Dynamics Land Systems is a business unit of General Dynamics Combat Systems. In the third quarter of 2012, Combat Systems reported revenues of $1.96 billion, down 8.6% year over year. Total segment backlog was $15.9 billion versus $10.4 billion in the third quarter of 2011.

Moreover, more contracts are continuously flowing in for the segment. A few days back, the segment received a $395 million contract for research, development and testing in preparation for the Abrams main battle tank Engineering Change Proposal 1 (ECP1) production from the U.S. Army TACOM Contracting Command. Over the next one-year, the segment has an initial value of $80 million.

We view General Dynamics as a well-run company that is likely to continue delivering on expectations, driven by revenue growth, margin expansion and cash flow generation. Looking forward, key drivers include a reviving business jet market business (Gulfstream) and a stable business for U.S. military vehicles (Stryker combat vehicles and Abrams tanks).

However, we remain concerned due to the U.S. defense budget, where the threat of budget cuts is looming. Also, we are slightly cautious about the risks related to the execution of key projects. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock.

Based in Falls Church, Virginia, General Dynamics Corporation engages in mission-critical information systems and technologies; land and expeditionary combat vehicles, armaments and munitions; shipbuilding and marine systems; and business aviation. The company operates through four segments: Information Systems & Technology, Combat Systems, Marine Systems, and Aerospace.

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